CEER Advice on
Ensuring Market and Regulatory
Arrangements help deliver DemandSide Flexibility
Ref: C14-SDE-40-03
26 June 2014
Council of European Energy Regulators asbl
Cours Saint-Michel 30a, Box F – 1040 Brussels, Belgium
Arrondissement judiciaire de Bruxelles – RPM 0861.035.445
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Ensuring market and regulatory arrangements help deliver demand-side flexibility
INFORMATION PAGE
Abstract
In 2013, the Council of European Energy Regulators’ (CEER) Sustainable Development
Task Force (SDE TF) committed to produce a report exploring the emergence of demandside flexibility (DSF) within the regulated electricity sector. Demand-side flexibility has the
potential to offer a range of benefits, such as reduced system/consumption costs,
enhanced generation adequacy and greater accommodation of intermittent renewable
energy sources (RES). However, appropriate market and regulatory arrangements
must be in place before this potential can be realised.
This paper, together with its companion annexes and consultation document, sets out the
background, definitions, opportunities and barriers associated with the emergence of DSF.
It concludes by offering a series of high level principles which regulators consider should
govern how DSF operates as well as a number of short to medium term recommendations
for regulators and other interested parties to take forward.
This CEER Advice supports regulators’ further work in this area within CEER, ACER and
the European Commission’s Smart Grids Task Force, which in turn will help inform wider
developments in European energy policy and ensure the market and regulatory
arrangements help deliver demand-side flexibility.
Target Audience
European Commission, National Regulatory Authorities (NRAs), Transmission System
Operators (TSOs), Distribution System Operators (DSOs), energy suppliers and generators
(of all sizes), traders, aggregators, energy customers, energy industry, consumer
representative groups, network operator representative bodies (e.g. ENTSO-E), Member
States, academics and other interested parties.
Keywords
Demand-side flexibility; markets; networks; aggregator; tariffs; consumers; smart meters
If you have any queries relating to this paper please contact:
Ms Natalie McCoy
Tel.
+32 (0)2 788 73 30
Email: [email protected]
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Table of Contents
EXECUTIVE SUMMARY ............................................................................................................4
1
INTRODUCTION ..................................................................................................................5
1.1 Process to date .............................................................................................................5
1.2 Structure .......................................................................................................................6
1.3 Consumer Perspective ..................................................................................................6
1.4 Next steps .....................................................................................................................7
2
CEER DEFINITION AND EXPLANATION OF DEMAND-SIDE FLEXIBILITY .....................8
2.1 CEER definition .............................................................................................................8
2.2 Explanation ...................................................................................................................9
3
POTENTIAL BENEFITS OF DEMAND-SIDE FLEXIBILITY...............................................14
4
POTENTIAL BARRIERS TO DEMAND-SIDE FLEXIBILITY..............................................17
4.1 Potential Barriers identified by stakeholders ................................................................17
5
FUTURE DEVELOPMENTS ..............................................................................................20
6
CONCLUSIONS .................................................................................................................22
ANNEX 1 – CEER ....................................................................................................................24
ANNEX 2 – DEFINITIONS AND ABBREVIATIONS .................................................................25
ANNEX 3 – RESULTS OF INTERNAL NRA SURVEY AND PUBLIC WORKSHOP ................27
ANNEX 4 – CASE STUDIES ....................................................................................................29
ANNEX 5 – RELATED DOCUMENTS ......................................................................................36
List of Figures
Figure 1: Types of price-based and activation signals ................................................................. 9
Figure 2: Use of DSF across the electricity system ................................................................... 10
Figure 3: Market-led DSF illustration ......................................................................................... 11
Figure 4: Simplified Representation of Demand-Side Flexibility ................................................ 12
Figure 5: Potential benefits of Demand-Side Flexibility ............................................................ 15
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EXECUTIVE SUMMARY
Background
The Energy Efficiency Directive 2012/27/EU (EED) entered into force on 4 December 2012
and most of its provisions must be implemented by EU Member States (MS) before 5 June
2014. Article 15 of the EED addresses demand response, explicitly the role of National
Regulatory Authorities (NRAs) in encouraging demand response to participate in wholesale
and retail markets (including balancing and ancillary services markets).
To assist NRAs’ understanding and implementation of the provisions of the EED, CEER
started work on this topic in 2013 with an internal survey among NRAs and a public
consultation. The goal of this work is to provide best practice examples (drawn out in the
public consultation paper’s case studies) and also to draw out some key principles and
specific recommendations in the form of this advice paper.
Main Objective
This advice paper is designed as input to advance the ongoing discussion about the scope,
players and benefits of demand-side flexibility from both a network and market perspective.
This work is part of an ongoing process that should contribute to assistance for NRAs and
MS on how to encourage the participation of demand-side resources in their markets and
networks.
It also sets out regulators’ views on the high-level principles which should govern demandside flexibility and allow it to be facilitated at the wholesale, network and retail levels.
Conclusions
As a high-level outcome, CEER wants to unlock the value of demand-side flexibility for
the provider/customer. This requires:
 That consumers and market participants have the necessary information and tools to
adequately and effectively engage in the market;
 A market free from barriers that promotes equal access for all parties and new entrants,
through interoperable standards and arrangements; and
 A regulatory framework that is flexible enough to adapt in an evolving market.
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1
Introduction
In the Energy Efficiency Directive, EED (2012/27/EU), European energy regulators are given
an explicit role for encouraging demand response participation in wholesale and retail
markets.
Article 15(8) of the EED states:
“…national regulatory authorities [should] encourage demand-side resources, such as
demand response, to participate alongside supply in wholesale and retail markets.
Subject to technical constraints inherent in managing networks, Member States shall
ensure that transmission system operators and distribution system operators, in
meeting requirements for balancing and ancillary services, treat demand response
providers, including aggregators, in a non-discriminatory manner, on the basis of their
technical capabilities”.
Demand-side flexibility (DSF) has the potential to provide significant and multiple
benefits: to enhance network security, to increase competition in markets, to aid industrial
competitiveness, to minimise the need for investment, and, ultimately, to benefit customers.
However, the realisation of DSF, at least in part, relies on the market and regulatory
arrangements which exist. As custodians of these arrangements, regulators therefore have
a role in facilitating DSF, as well as a direct responsibility under the EED.
It is for this reason that regulators in the Council of European Energy Regulators (CEER)
have assessed the current state of play and formulated this advice. The advice is
addressed to both policy makers and the regulators themselves. In particular, it will act
as an umbrella set of principles which will guide regulators as they drill down into specific
aspects of DSF in the coming years.
1.1
Process to date
Originally conceived as a response to the NRA-specific obligations in the EED, this paper
has subsequently broadened its scope to consider the wider market and regulatory
arrangements necessary for DSF to emerge and participate/compete alongside other forms
of flexible capacity (generation, storage, interconnection) on a level playing field.
The work began in 2013 with an internal survey of CEER member NRAs on the status of
DSF in their countries (see Annex 3), followed by a 6-week public consultation in
November/December 2013 and a stakeholder workshop at CEER, Brussels, on 18
November 20131.
This document is the culmination of that work and sets out regulators’ views on the highlevel principles which should govern DSF and allow it to be facilitated at the
wholesale, network and retail levels.
1
Further details of the public consultation and workshop can be found on the CEER website here.
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The report, prepared by CEER’s Sustainable Development Task Force, represents the first
piece in the jigsaw of CEER’s work in this area. In late 2014 CEER will bring forward a Green
Paper on the ‘Role of the DSO’ followed in 2015 by a customer-orientated Benchmarking
Study on Demand-Side Response and Energy Efficiency.
This paper is also related to the ACER paper and public consultation on “Energy Regulation:
A Bridge to 2025” on the likely changes and necessary regulatory responses to the critical
2014 – 2025 period.
NRAs are also contributing to the wider work on flexibility as part of the European
Commission’s Smart Grids Task Force (EG3)2.
1.2
Structure
The document is divided into five main sections:





1.3
CEER definition and explanation of Demand-Side Flexibility
Potential benefits of DSF
Potential barriers to DSF (as viewed by stakeholders)
Future developments
Conclusions (key principles and specific measures to enable DSF)
Consumer Perspective
CEER regards customer participation in the electricity market as extremely important, and
realising the potential of demand-side flexibility offers an important route to increasing that
participation. In particular, CEER views the restoring and building of consumer trust in energy
markets as key, and in 2012 launched its joint statement (in conjunction with BEUC, the
European Consumers Organisation) on its 2020 Vision for Europe’s Energy Customers3.
In this context, DSF – if enabled to compete on a level playing field with other measures such
as interconnection and electricity storage – has the potential to bring significant benefits
to consumers (including ‘prosumers’), from both an engagement/ empowerment (over
their own energy use and ability to control bill impacts) and avoided/deferred
investment (a more flexible grid may defer investment in new generating capacity)
perspective.
CEER calls for the interests of all consumers to be a key consideration during
formulation of future DSF policies at national and European level.
2
http://ec.europa.eu/energy/gas_electricity/smartgrids/taskforce_en.htm
3
http://www.ceer.eu/portal/page/portal/EER_HOME/EER_PUBLICATIONS/CEER_PAPERS/Customers/Tab3/CE
ER-BEUC%202020%20VISION-joint%20statement_Long_v03062014.pdf
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1.4
Next steps
Work on DSF remains an ongoing process and this advice paper is to be seen as part of a
European effort to better understand the scope and needs of the different players engaged in
DSF, as well as identifying the underlying benefits and the possible barriers to its
emergence. CEER will keep working on the topic to deepen its knowledge about the different
aspects of DSF and inform regulatory policy at a national and European level.
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2
CEER definition and explanation of demand-side flexibility
Key points:
 Demand-side flexibility is the capacity to change electricity use in response to a signal that can
be price-based or a contractual arrangement
 DSF has the potential to provide value throughout the energy system (markets and networks)
 The relationships between reducing/increasing peak/off-peak demand and system balancing
are fluid, but crucially DSF can also be used to increase demand when that is desirable for an
increasingly unpredictable generation portfolio and balancing (frequency control)
2.1
CEER definition
CEER’s definition4 of demand-side flexibility seeks to distinguish DSF or demand response,
from demand-side participation, demand-side bidding, or flexibility in a wider sense, as well
as energy efficiency (entailing a permanent demand reduction). Further detail and
exploration of this definition can be found in the consultation document which can be read as
a companion to this paper. The CEER definition of DSF states:
“Demand-side flexibility can be defined as the capacity to change electricity usage
by end-use customers (including residential) from their normal or current consumption
patterns in response to market signals, such as time-variable electricity prices or
incentive payments, or in response to acceptance of the consumer's bid, alone or
through aggregation, to sell demand reduction/increase at a price in organised
electricity markets or for internal portfolio optimisation.
The objective of such market signals is to induce modulation (increase5 or reduction)
of electricity usage and to optimise usage and balancing of networks and electricity
production and consumption, for example by consuming less during peak times or by
facilitating the integration of increasing electricity generation from variable renewable
energy sources and micro-generation.”
This definition acknowledges that DSF can be the result of a wide range of signals, from
price-based time-of-use tariffs or critical peak pricing to contractual-based direct load control
(which may be automated). In the space between these signalling methods, a wide range of
DSF can be used by varied actors, explored further in Chapter 3.
4
5
Builds on an earlier CEER definition: “Changes in electric usage by end-use customers/micro generators from
their current/ normal consumption/injection patterns in response to changes in the price of electricity over time,
or to incentive payments designed to adjust electricity usage at times of high wholesale market prices or when
system reliability is jeopardised. This change in electricity usage can impact the spot market prices directly as
well as over time.” [Source: CEER Advice on the take-off of a demand response electricity market with smart
meters, 1 December 2011]
An increase in electricity consumption is necessary to provide negative balancing energy and may be desirable
when demand is low and negative prices/RES curtailment occurs.
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Figure 1: Types of price-based and activation signals [Source: adapted from Potential Implementation of Demand
Side Approach Methods in ERRA Countries, ERRA 2009]
As stated in the definition of DSF, the modulation of the expected consumption pattern
can result in a shift, i.e. an increase as well as in a decrease, in electricity usage,
without necessarily affecting the overall consumption level.
While the benefits of the latter are obvious in terms of security of supply (for example during
peak periods), the interest in seeking a higher level of consumption during off peak periods
may raise some concerns that this could create an artificial ‘second peak’ or work against the
overall European energy efficiency and demand reduction objectives.
There may be a need in certain cases to contain that increase, although under normal
circumstances shifting consumption to different times of the day, as a reaction to a signal,
might be of interest for the network especially regarding the integration and management of
renewable generation peaks, and should therefore allow for this form of DSF.
2.2
Explanation
CEER’s definition of DSF involves both sides of that flexibility – i.e. a reduction or an
increase in demand. These two sides have to be able to access the market alongside
supply. For system balancing, an increase in electricity usage is usually required to provide
negative balancing energy, while for the integration of renewables shifting demand to time
periods with lower consumption or ‘valley filling’ might be a solution to prevent temporary
feed-in reductions. It could also allow market players to profit from lower wholesale electricity
prices (see Figure 3).
DSF encompasses various forms of dynamic changes in energy consumption. These
changes have value for various parties throughout the whole energy system (disaggregated
into Balancing, Capacity, Generation and Networks services and described in Figure 2
below). In the Networks box, we can include voltage control, reactive power and load
management.
To better understand the value and motivations of different players to engage with DSF, an
artificial distinction can be made between DSF for market purposes and network purposes.
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

DSF for market purposes includes any demand side flexibility triggered through market
signals that balances out the system, ensures adequate generation capacities or reduces
overall generation costs.
DSF for network purposes can be as an alternative or substitute for network assets.
In practice however, the delineation between DSF for market and networks purposes is not
always straightforward as the response for network purposes may also contribute benefits for
market participants, and indeed market signals/competition is also possible in the network
segment of the regulated energy market.
Figure 2: Use of DSF across the electricity system [Source: adapted from Creating the Right Environment for
Demand-Side Response, Ofgem 2013]
DSF for market purposes
The main opportunities for DSF in the market lie in its potential for valley filling, peak shifting
and balancing as shown in Figure 3. In terms of peak shifting and valley filling these may
occur independently of each other, though there may often be a ‘mirrored effect’. This dual
aspect of DSF allowing demand to increase (valley filling) as well as decrease (peak
shifting) is important to highlight.
It is also important to note that regardless of the parties involved in these actions it is the
overall outcome which is of primary importance, i.e. improved system efficiency,
generation adequacy, increased penetration of intermittent RES generation, and
deferred or avoided network investment. It is also the case that in some MS negative
prices are not allowed so RES must be curtailed in some circumstances.
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Expected consumption
Real consumption
Demand (GW)
Peak clipping
2
Valley filling
1
3
Balancing
Hours
Figure 3: Market-led DSF illustration [Source: adapted from CRE internal document]
DSF for network purposes
In terms of the benefits of DSF as a substitute for network assets, further research is needed
to quantify these. Indeed, both the quantitative value of DSF and mechanisms to trigger this
kind of flexibility lack practical and theoretical investigation. However an enduring reduction
of 2MW in peak load demand as a result of DSF measures should, in theory, mean 2MW
less capacity required on the network with the potential for reduced investment in network
infrastructure in the long term. It is likely that the market and network benefits of DSF are
complementary and not competing.
Cost and availability of DSF
The following graph (Figure 4) illustrates the main categories of DSF that can be identified
while assessing the different realities in terms of costs and availability of the resource6. For
example, residential DSF will usually require significant capital costs to gather small amounts
of flexibility from thousands of consumers, but will probably cost very little to operate once
deployed.
Conversely, large industrial consumers will often be able to provide a significant amount of
flexibility (up to hundreds of MWs) with low capital costs, but will in contrast require very high
operational costs because of the higher value of the curtailed energy and the impact on the
industrial process. Due to the impact on the industrial process and associated costs
(resulting from a change in the consumption pattern of the site) it could be that in certain
cases DSF would not be profitable and therefore not implemented.
6
The graph was prepared by the French national regulatory authority, CRE, drawing out a schematic of DSF
types and characteristics. It does not represent all potential DSF technologies nor the reality in all European
countries, but it does give a good overview of possible DSF categories and their intrinsic characteristics.
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Aside from the cost of activation, another key element that has to be assessed when
conducting a cost-benefit analysis (CBA) for DSF is the availability of the resource. As with
generation units, the different DSF capacities will be able to provide different ranges of
availability, from only a few to several hundred hours a year. Reaction times, especially in
balancing markets, are another key element.
7
Figure 4: Simplified Representation of Demand-Side Flexibility [Source: adapted from CRE internal document ]
The following text provides some further explanation of the component parts in Figure 4:
Back up generation (‘grey DSF’): some industrial sites have their own back-up generation
units, usually small fuel generators that are able to provide power to the site in case of
emergency situations. This is sometimes referred to as ‘behind the meter’ generation or ‘grey
DSF’, and is distinct from ‘green DSF’ which is the result of a genuine turn down and shifting
of consumption on the network. As these back-up generation units have typically been put in
place for security reasons, the consumer does not have to bear any capital costs to run the
units in other situations and to value the flexibility they provide. However, those units are
usually very expensive to run and will only be used if the prices go over 200-300 €/MWh or
even higher, which implies (just as for generation peak units on the network) a low number of
running hours.
Large industrial consumers: DSF provided by industrial consumers (when it interrupts a
production process) can also have very high operational costs due to the possible
disturbance to the industrial process caused by the temporary stop. In contrast to back up
generation units, industrial consumers usually have to bear additional investment costs (even
though limited) to put this flexibility into place (special telecom process etc.).
7
See footnote 6, page 11.
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Stock management: this specific kind of flexibility can be provided by industrial consumers
that use processes with high inertia which can be moved easily according to market
opportunities. For example, water treatment stations or cold storage units will be able to
modulate their consumption while keeping the same level of production overall and therefore
encounter no loss of value. This kind of flexibility is therefore usually less expensive to run,
but it can also require higher capital costs because of the higher technological requirements
to assess the flexibility potential and to plot the consumption level accurately.
Residential DSF: this flexibility usually requires gathering the potential of a large amount of
small consumers in order to achieve a minimum size, which requires higher capital costs
(though these are mostly for communications and IT systems, and have to be borne entirely
by the residential consumers). Once the capacity is available it can be activated at minimal
operational costs (no loss of industrial production, very few variable costs in general) and
repeated almost every time market conditions present opportunities (dependent on pool size,
application, and duration). However, the end-user’s level of comfort can limit the overall
amount of flexibility he/she will be willing to provide.
From another perspective, when conducting a CBA analysis, the benefits of DSF depend
significantly on the characteristics of the market; in other words, no intrinsic value of DSF can
be measured. Market mechanisms have to be designed so not only the technical but also the
economic barriers to the full participation of DSF are levered in order to reflect the full value
DSF can bring to the electricity system.
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3
Potential benefits of Demand-Side Flexibility
Key points:
 There is widespread agreement on the potential for Demand-Side Flexibility to benefit the
energy system as a whole, for example by contributing to generation adequacy, increased RES
penetration, and reduced balancing costs
 The costs and benefits of DSF are uniquely difficult to quantify at a macro level, however
numerous studies have demonstrated its potential
 When assessing the environmental benefits of DSF, it is important to factor in the distinction
between back-up generation (‘grey DSF’) and genuine load shifting as a result of turn
down/ramp up on the network (‘green DSF’)
The following section sets out the potential benefits of DSF including some of the benefits
highlighted by stakeholders in our public consultation. Most of these responses recognised
that DSF has great potential to benefit consumers and other actors, as well as the system as
a whole.
Market integration of RES: DSF can be an important tool to handle the increasing shares of
intermittent generation in the electricity system. Balancing the network not only from the
supply side but also from the demand side is a growing necessity when considering
increasing penetration of renewable energy (RES) feed-in.
Looking at the overall costs for the system, DSF can result in reduced investments in
generation capacity, thus reducing system costs. Under certain conditions, DSF can
therefore be cheaper and available more quickly than additional generation capacity.
Benefits for consumers: when it comes to the current benefits for consumers it is
reasonable to state that it is mainly industrial consumers that benefit from DSF. Current
arrangements for DSF make it much more attractive for large consumers with higher
electricity consumption (and higher costs per MW) than for domestic households. It is
therefore more likely that larger industrial or commercial consumers will engage with DSF to
create an additional income stream by selling flexibility and reducing their energy costs, or
mitigating against cost increases.
A major benefit for consumers is that whenever DSF participates in the market it can help to
substitute peaking power plants, thus reducing peak prices which in turn can be passed on to
consumers via lower energy bills. The wider system benefits leading on from this include a
real contribution to the Internal Energy Market and greater integration of renewables.
Given the proportion of total demand that is made up of residential consumers across the
EU, it is likely that following the roll-out of smart meters there are potential benefits from
capturing the value of residential DSF8.
8
Further assessment of the potential benefits and the enabling market features (or lack thereof) will be
necessary.
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Environmental benefits: there are also potential environmental benefits9 to DSF. When it is
fully integrated in the market, society as a whole may be able to cover its energy needs with
less installed generation capacity. This results in more resource efficiency and in a reduction
of CO2 emissions, as current peak units do not have to ramp up and curtailment of nonprogrammable RES (i.e. wind, solar) can be avoided.
Benefits for competition and innovation: finally, DSF can contribute to a more competitive
and innovative environment by enabling new actors to enter the market with new business
models, services and products (e.g. smart appliances). The number of participants in the
energy market is likely to grow as a result of more demand-side flexibility, which in turn can
lead to greater market liquidity and competition (especially in balancing markets).
Achieving the full potential of DSF will require a market design that rewards the provider of
the flexibility for the benefits it brings. The following table (Figure 5) sums up the main
benefits of DSF that have been identified, and the mechanism to provide a proper
remuneration to the provider of the flexibility. Some respondents to our consultation
stressed that as of today the incentives that consumers were receiving to adjust their
consumption did not reflect the value that it could bring to the system (during peak periods
for instance).
Potential benefits
Details
Valuation (where DSF service/product
engages)
Improved longterm security of
supply
•
Avoided investment in peak
generation units
Back up for intermittent
generation
•
Participation in capacity remuneration
mechanisms
Improved shortterm security of
supply
•
Additional flexibility, reduction
of balancing costs
•
Participation in balancing reserves
(capacity + energy remuneration)
Reduced market
price
•
•
Production cost savings
Lower spot prices
•
Spot price
Reduced network
costs
•
Reduction of losses recovery
costs
Avoided investment costs
•
•
Reduced network tariffs
Difficult to assess the value at this stage
•
•
Better integration
of renewables
•
Increased flexibility to manage
renewables intermittency
•
•
Cheaper balancing reserves
Wholesale market (negative prices/RES
curtailment)
Environmental
benefits and
energy savings
•
Potential reduction of global
CO2 emissions
If deferment is less than 100%
•
•
EU ETS dedicated mechanism
Dedicated mechanisms (white
certificates, direct subsidies programme)
Social and
economic
benefits
•
Reduction of fossil fuel import
dependency
Industrial competitiveness
Jobs and innovation
•
Risk covered in the pricing of fossil
generation
No direct link with DSF action
Net jobs creation
•
•
•
•
•
Figure 5: Potential benefits of Demand-Side Flexibility [Source: adapted from CRE internal document]
9
Unpublished studies indicate that local environmental benefits may be affected by the use of diesel generators
to provide demand-side flexibility.
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Figure 5 illustrates that the main benefits from DSF (as identified by respondents to the
public consultation) can be valued by market mechanisms that are already in place,
suggesting that the EED recommendations in this respect have been met. The key question
is whether the opportunity exists for DSF to participate in those mechanisms or not, as well
as the effectiveness of the mechanisms. Given that the mechanisms are in place, the
incentives to trigger DSF (and its underlying value) will likely increase going forward.
However, the cost of deploying DSF will have to be compared to market signals in order to
trigger (or not) additional DSF capacities.
For instance, a market with no ‘long term’ security of supply issues (i.e. having enough
installed capacity to meet peak periods) will probably send very few, if any, signals for
additional network capacity to be developed. Yet, if additional flexibility is required on this
market, the price of balancing reserves or bids might send a signal for DSF providers to
develop additional capacities to sell to the transmission system operator (TSO) on the
balancing mechanism. With limited access to the market mechanisms, DSF providers might,
however be unable to assess what value additional capacities could gain.
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4
Potential Barriers to Demand-Side Flexibility
Key points:
 Stakeholders hold a varied set of views on barriers to the proper emergence of DSF. CEER
acknowledges that some of these may be detrimental to the emergence of DSF across Europe
 The emergence of new actors will be a game-changer in terms of engaging consumers (at
various levels) and in their relationships with incumbent DSOs and suppliers
 In particular, the evolving energy landscape will entail significant changes to how market
participants operate, with significant opportunities for DSOs
The following section sets out some potential barriers to DSF which, following analysis,
should allow regulators and policy makers to focus their efforts on creating the necessary
conditions for DSF to emerge.
4.1
Potential Barriers identified by stakeholders
These are based on the responses to our consultation and the public workshop.
Understandably, different stakeholders view these barriers from different perspectives, either
regulatory, legislative, market, or other. Similarly, the extent to which something is perceived
as a barrier or not depends on the stakeholder or the situation in their respective national
market. A full evaluation of stakeholder responses can be found on the CEER website10.
For this summary, the barriers identified are grouped under thematic headings: markets,
regulatory, pricing/signals, and political, technological & social aspects.
Theme 1 – Market arrangements11

Market access and transparency: in some MS, aggregated DSF does not have legal or
direct access to the balancing and/or wholesale markets. This can occur where the
consumer consents for their load profile to be shared with a third party, but the supplier,
Distribution System Operator (DSO) or Balancing Responsible Party (BRP) prevents third
parties from accessing this data12. It is this data which is necessary to determine if the
consumer’s consumption pattern suggests the potential for DSF services to be offered.
This can prevent new entrants from participating in the market and customers from being
rewarded for the value of their flexibility. Other barriers include minimum trading volumes
and non-acceptance of aggregated bids.

Measurement and verification of DSF: the determination of the baseline (the level of
consumption that would have existed without DSF) is very important. DSF will not be able
to compete on a level playing field with supply and other flexibility measures if it cannot
be properly measured and certified.
10
11
12
Link to Evaluation of Responses on CEER website
An important caveat is that depending on the system requirements in a MS different approaches may be
required to allow DSF to access the market, although proven and unjustified barriers should be removed.
In many MS independent DSF providers need to have the retailer’s/BRP’s permission (and that of the DSO and
TSO) to offer DSF services/products to a consumer giving the retailer/BRP power to discriminate by refusing,
charging prohibitive fees, etc.
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Theme 2 – Regulatory Framework

Lack of an overall framework for DSF: a coordinated framework may be required to set
out what needs to be achieved to realise DSF but leave participants the freedom to
determine how to reach that goal. This includes the need for balancing responsibilities to
be clearly defined and constantly monitored.

Need for clearly defined roles for market participants: this is clearly an issue which
presents stakeholders with difficulties, though there are differing views among them on
the exact delineation between roles. The lack of clarity regarding the role of aggregators
as well as the relationship between TSOs, DSOs and market operators is problematic.

Role of DSOs: there are different roles for DSOs across the EU which have developed
over time. This indicates that a one-size fits all approach as to DSOs’ engagement with
DSF may not produce efficient outcomes in each MS. Whether or not the DSO is already
a market facilitator will likely impact its future role in an evolving energy market. There
should be equal and fair access to DSF markets for all actors in these differing
market set-ups.
Regulatory preparation for a more actively managed distribution network is necessary.
Where DSOs have an advantaged position in terms of access to metering data, it should
be examined to what extent allowing a DSO to provide competing services could distort
the market.
Methodologies for how system states (which describe the impact of grid and market
interactions on the network) are monitored, calculated, audited and controlled may need
to be more clearly defined based on the local distribution network characteristics. DSF
measures should be taken into account when assessing service quality measures in this
context.

Unbundling: the 3rd Energy Package rules are less stringent on DSOs as opposed to
TSOs. In those MS where DSOs act as a market facilitator there are legitimate concerns
over the information asymmetries between DSOs and suppliers or other third party actors
wishing to engage consumers in DSF services/products. There is also a broader question
on whether unbundling helps create the right incentives for DSOs to be ‘neutral market
facilitators’ when many now wish to actively participate in the market. These questions
will be examined in more detail in a CEER Green Paper on DSOs later in 2014.
Theme 3 – Pricing/Signals

Regulation: consideration needs to be given to how upfront investment in DSF enablers
is funded and recovered, and how this cost is treated in the current regulatory framework
across the different MS. The increasing role of Smart Grids and Information
Communications Technology (ICT) will affect these different regulatory frameworks in
different ways.
Also where DSF affects the load profile this should be factored into network planning.
Currently in many countries, network tariffs (including levies and taxes) are set in a way
that discourages certain industries from participating in DSF.
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
Current grid tariff structures could create an unfair allocation of costs among users,
especially due to metering constraints which result in users being on the same tariff
despite creating different costs. As the number of “prosumers” increase there may be an
impact on grid fees.

In many countries, DSOs always have to connect network users without delay and
offer the same unlimited access to network capacity at any time. If unlimited access is not
possible due to constraints (even if only for a few hours per year). DSOs may have to
extend the grid, unless they have a separate DSF arrangement with that customer.

Retail price regulation: this is frequently cited as a fundamental barrier to the
emergence of DSF.
Theme 4 – Political, Technological & Social aspects

Implementation of legislation: work on implementing the 3rd Package and EED needs
to continue (progress within ACER and the ENTSOs and at national level by NRAs and
TSOs as well as in the European Commission’s Smart Grids Task Force and in various
standardisation bodies is helpful in this regard).

Consumers: there needs to be a shift in policy focus from the potential of technology to
actually meeting consumer needs, and the reality of their current engagement with the
market. Sometimes even simple tariffs can be difficult for consumers to understand so
new DSF tariffs need to tackle this challenge. Access to data is fundamental for DSF, but
consumers need to be protected (though regulation on data protection and privacy
already exists).
Consumers should have the same protections and rights when dealing with third party
intermediaries as when dealing with traditional retailers, and be able to easily identify
trustworthy third party intermediaries. There are additional concerns regarding how the
costs and benefits of flexibility will be shared between different consumer segments.

13
Smart Meters/technology: the roll-out of smart metering for households and commercial
customers with the appropriate functionalities remains a significant challenge. Smart
Meters are a fundamental enabling factor for DSF, however some of the current
generation of smart meters may not be adequate to deliver all services required for DSF
and standardisation across Europe remains an issue13. In addition, many appliances are
not ‘smart ready’ so without making the feature mandatory, some appliances (e.g.
fridges) are unlikely to be available in sufficient numbers to deliver the potential benefits
of DSF.
CEER Status Review of Regulatory Aspects of Smart Metering (Including an assessment of roll-out as of 1
January 2013)
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5
Future developments
Current market regulations were developed to manage large, reliable load from
predominantly thermal generation, and are less well suited to management of intermittent
generation or facilitating flexible demand, which means that demand-side flexibility measures
can often be under-valued compared to other balancing mechanisms. However, this situation
is slowly beginning to change across MS as regulators and market participants react both to
the challenges associated with the transition to a low-carbon energy system as well as the
associated benefits and opportunities for new business models.
As highlighted consistently by stakeholders, regulated retail prices make realising the value
of DSF for residential consumers difficult. In accordance with the 3rd Package, some of
those NRAs across Europe which have regulated energy prices have agreed to phase them
out over time14. In most cases, the phasing out of regulated pricing should improve the
accuracy of market signals, which in combination with dynamic pricing will lead to more
effective demand-side incentives by allowing consumers and micro generators to benefit
from the genuine value of shifted demand and generation.
The increasing emergence of aggregators and other actors suggests that DSF will play an
increasing role in the future as a result of growing shares of intermittent RES production in
the energy system. This will make planning and management of supply and demand an
increasingly complex task. Therefore, there is a need to develop new solutions to enhance
the hosting capacity of the distribution grid, and minimise situations where RES feed-in has
to be reduced.
For traditional energy system participants, on the other hand, diversifying business models
and marketing strategies towards value added services is no longer seen as an option but as
a necessity. This is equally true for DSOs as they may face increased local constraints on
their grid due to the boom of distributed generation and the anticipated increase of other
distributed energy resources, such as electric vehicles and heat pumps.
The flexibility of residential customers will eventually grow in importance, though it will be
more challenging to trigger. To have a successful business case in this segment,
stakeholders have identified as key prerequisites the existence of price signals, smart
metering of energy consumption (at least on an hourly basis), automation of processes,
simplicity of load control, and visibility of benefits.
The availability of dynamic pricing models within the spot market is expected to trigger more
implicit DSF in combination with the development of tailor made flexibility services. With
implicit DSF, shifting decisions as a response to price signals remain in the hands of the
process owner (company). In addition, direct contractual arrangements between (industrial)
consumers and network operators/ aggregators/ suppliers, for example for load control,
should further increase the use of explicit demand response for which the shifting decision is
passed on to an external party. The two approaches lead to different transaction costs and
present different economic potential15.
14
15
COM(2012) 663 final
Please see section 2.4 of our consultation document for a more detailed explanation of implicit and explicit
pricing for DSF.
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Regulators will need to further analyse the implications for consumers of dynamic pricing
such as time-of-use tariffs, time of use network tariffs or any other dynamic pricing element
(which could also be location specific). They will have to consider ways in which efficiency in
the use of the network may be encouraged, e.g. to assess in more detail how specific
components/characteristics of network tariffs might impede the emergence of DSF.
CEER recognises that competition requires careful oversight, to ensure that customers are
treated fairly, get the best possible deal available and are empowered to exercise their right
to choose on an open market. Regulated prices (when set below costs) can distort the
functioning of the competitive market and hinder the goal of customer protection and
participation. The impact of all regulated prices on the emergence of DSF will need to be
monitored to ensure distortions on national and neighbouring markets for DSF are avoided.
More opportunities for DSF should emerge from it having increased access to all available
energy markets (balancing, wholesale, retail and capacity) and through adapted
requirements for that access allowing for competition between generation and DSF on an
equal footing. However, due to the complexity of energy markets (perceived as a market
barrier), notably the design of national balancing systems, suppliers and portfolio
management firms (e.g. aggregators) will play an important role in promoting products and
services to facilitate more active demand-side participation in wholesale markets. Through
DSF, market parties may bear responsibility for balancing their short-term portfolios which
can create a considerable efficiency gain contributing to market integration.
Alongside the emergence of new DSF services, new actors, such as aggregators and Energy
Service Companies (ESCOs), with business models that offer consumers a market valuation
of their flexibility have entered the arena and are staking a claim to a level playing field with
the historic incumbent providers of DSF (often the consumers’ existing suppliers). The
emergence of these new actors in many European markets presents opportunities and
challenges to regulators, consumers and previous market participants.
Therefore, while assessing the barriers that have to be addressed in order to allow the full
implementation of the EED requirements, regulators also need to make sure that nondiscriminatory access to the flexibility of the consumers is ensured. This specific point
addressed in our consultation document has been confirmed through responses to that
consultation and by views raised at the public workshop and other fora.
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6
Conclusions
Based on the experience of the public consultation and workshop as well as the expertise of
its member NRAs, CEER has agreed a set of high level principles which we believe
should govern Demand-Side Flexibility and enable it to play an unhindered role in
European energy markets.
Following on from this, we have also set out some actions which CEER (and other
parties) will take forward in the short to medium term. These are high level
recommendations which in some cases set the scene for the more detailed examination and
development in work which CEER (and ACER and other parties) will take forward in the
coming years.
While many of these recommendations are similar to others already in the public domain, we
hope that this paper can help to identify the ‘quick wins’ in facilitating DSF while at the same
time drawing attention to areas which need further consideration.
Principles governing demand-side flexibility

As a high-level outcome CEER wants to unlock the value of DSF for the
provider/customer. This requires:
o That consumers and market participants have the necessary information and tools to
adequately and effectively engage in the market;
o A market free from barriers that promotes equal access for all parties and new
entrants, through interoperable standards and arrangements; and
o A regulatory framework that is flexible enough to adapt in an evolving market.

Consumers should be able to participate actively / provide their flexibility within
the market. Market driven signals such as dynamic pricing or contractual direct load
control, automated signals, well designed products and services, and service providers
are all key to enhancing the participation of consumers.

In a well-functioning market every kind of flexibility should have access, whether it
corresponds to an increase or a decrease of the expected consumption level. By
ensuring that the most efficient flexibility option can assert itself, NRAs can help prevent
market distortions.

An equal footing between DSF and supply resources on all energy markets should
be ensured, if they provide the same service to the system. This can be
accomplished when consumers receive concrete economic benefits from providing their
flexibility in response to a signal.

In order to facilitate a level playing field an independent party should facilitate the
administration of the different exchanges (energy, information, financial) between
the commercial parties.

While respecting commercially sensitive information, there should be mechanisms and
processes in place to ensure that all parties have visibility of the DSF actions taken
by any one party which impacts their business. This will enable those other parties to
take account of the DSF in their business operation, without them having their own
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separate arrangement with the customer. Only this visibility will allow customers to
receive the full, system wide benefit of their engagement with DSF.

Distortions to market signals that would unfairly advantage or disadvantage DSF
should be avoided in order not to create an artificial bubble or a situation where there is
under investment in DSF. Unjustifiable barriers to market entry should be removed.

In considering the most cost-effective solutions to local network congestion and
security, DSF should eventually be considered alongside traditional network
reinforcement options by TSOs and DSOs.
Specific recommendations/actions for regulators and policy makers

The roles and responsibilities of all involved actors (market participants, DSOs, TSOs
etc.) should be clarified to be consistent with a level playing field.

MS’ standards (e.g. for smart meters, white goods, etc.) and methodologies used to
assess the volume of DSF provided (such as the baseline) should be compatible with
other MS’ so as to avoid a lack of interoperability across the EU or market distortions.

The role of DSOs (and the structure of network tariffs) in an evolving market needs to be
examined16. In this context, NRAs and other relevant parties should assess the
(technical) options for DSOs to contract DSF services from a third party (e.g. supplier,
aggregator, virtual power plant) as an additional tool for local congestion management
(re-dispatching measure) within the current (unbundled) regulatory framework and in
respect of a level playing field for all involved parties.

All relevant actors (ACER, NRAs, MS, EC, ENTSOs) should continue to ensure that the
relevant network codes maintain a focus on promoting demand-side equally to supply
and other flexibility measures (e.g. Demand Connection Code, Load Frequency Control
and Reserves, and Electricity Balancing).

NRAs and other interested parties should continue to undertake studies and commission
technical analysis to quantitatively assess and compare the status and potential of DSF
across the EU, including specific details on prices/contracts and the volumes of energy
involved. The results should quantify how much DSF is being used currently to balance
the system, how much DSF is used at the distribution, commercial and domestic levels,
and how much of this value is being passed on to end-use consumers, including
residential consumers17.

NRAs should continue to observe if the market and regulatory arrangements for DSF are
such that the whole system-wide benefits of DSF (at the generation, transmission,
distribution and supplier/retail levels) are passed on to end-use consumers in a fair and
transparent manner.
16
17
The forthcoming CEER Green Paper on Role of the DSO will examine this issue.
As part of the its planned 2014/2015 deliverable, ‘Demand response and energy efficiency services:
Benchmarking report and case studies’, it is currently envisaged that CEER will examine a small number of
simple quantitative benchmarks to look at, for example, the number of demand-side response offers and the
number of customers taking up these offers across MS. It will be necessary for CEER and/or other interested
parties to add to this work to produce a more detailed technical assessment.
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Annex 1 – CEER
The Council of European Energy Regulators (CEER) is the voice of Europe’s national
regulators of electricity and gas at EU and international level. Through CEER, a not-for-profit
association, the national regulators cooperate and exchange best practice within and beyond
Europe’s borders. CEER includes national regulatory authorities from 33 European countries
(the EU-28, Iceland, Norway, Switzerland, FYROM, Montenegro and growing).
One of CEER’s key objectives is to facilitate the creation of a single, competitive, efficient
and sustainable EU internal energy market that works in the public interest. More specifically,
CEER is committed to placing consumers at the core of EU energy policy. CEER believes
that a competitive and secure EU single energy market is not a goal in itself, but should
deliver benefits for energy consumers.
CEER works closely with (and supports) the Agency for the Cooperation of Energy
Regulators (ACER). ACER, which has its seat in Ljubljana, is an EU Agency with its own
staff and resources. CEER, based in Brussels, deals with many complementary (and not
overlapping) issues to ACER’s work such as international issues, smart grids, sustainability
and customer issues. European energy regulators are committed to a complementary
approach to energy regulation in Europe, with the Agency primarily focusing on its statutory
tasks related to EU cross-border market development and oversight, with CEER pursuing
several broader issues, including international and customer policies.
The work of CEER is structured according to a number of working groups and task forces,
composed of staff members of the national energy regulatory authorities, and supported by
the CEER Secretariat.
This report was prepared by the Sustainable Development Task Force of CEER’s Electricity
Working Group.
CEER wishes to thank in particular the following regulatory experts for their work in preparing
this report: Joseph Gildea, Michaela Kollau, James Luger, Yvonne Finger, Romain Benquey
and Simon Behrens.
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Annex 2 – Definitions and abbreviations
ACER: the European Agency for the Cooperation of Energy Regulators.
Aggregator: an entity which offers services to aggregate energy production from different
sources (generators, consumers) and acts towards the grid as one entity, including local
aggregation of demand (demand-response management) and supply (generation
management).
Balancing Responsible Party (BRP): means a market-related entity or its chosen
representative responsible for its imbalances.
Balancing Service Provider (BSP): a market participant providing Balancing Services to its
connecting TSO, or in case of the TSO-BSP Model, to its contracting TSO.
CEER: the Council of European Energy Regulators.
Consumer: includes all residential, agricultural, industrial and commercial end-users of
electricity.
Contractual DSF: characterised by a contractual agreement between the consumer and the
party who requires the service. Consumers can voluntarily sign up to such programs, but
after joining, demand adaptation is usually not an option but a contractual arrangement.
These programmes include direct load control, interruptible/curtailable rates, emergency
demand response programmes, capacity market programmes and ancillary-services market
programmes.
Demand-side flexibility: the capacity to change electricity usage by end-use customers
(including residential) from their normal or current consumption patterns in response to
market signals, such as time-variable electricity prices or incentive payments, or in response
to acceptance of the consumer's bid, alone or through aggregation, to sell demand
reduction/increase at a price in organised electricity markets or for internal portfolio
optimisation.
The objective of such market signals is to induce modulation (increase or reduction) of
electricity usage and to optimise usage and balancing of networks and electricity production
and consumption, for example by consuming less during peak times or by facilitating the
integration of increasing electricity generation from variable renewable energy sources and
micro-generation.
Demand-side management: the planning, implementation, and monitoring of activities
designed to encourage consumers to modify patterns of electricity usage, including the
timing and level of electricity demand. Demand-Side Management includes demand
response and demand reduction.
Demand-side participation: the term given to an actor (consumer, supplier, DSO, TSO,
third party, or private company) who actively participates in a demand side action either
directly, through facilitation, or through receiving the benefits of that demand side action.
DSO: distribution system operator.
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Dynamic demand response: demand-side response that is in reaction to signals whose
pattern changes, sometimes in line with real-time data. This is distinct from static-demand
response.
Electricity demand reduction: the voluntary or involuntary reduction in electricity demand
by end-use consumers.
Energy efficiency: the ratio of output of performance, service, goods or energy to input of
energy consumption. Energy efficiency is a way of managing and restraining the growth in
energy consumption. Something is more energy efficient if it delivers more services for the
same energy input, or the same services for less energy input. EED: Energy Efficiency
Directive.
Energy service provider: a natural or legal person who delivers energy services or other
energy efficiency improvement measures in a final customer’s facility or premises.
Energy Service Company (ESCO): a commercial company providing a broad range of
energy solutions including designs and implementation of energy savings projects,
retrofitting, energy conservation, energy infrastructure outsourcing, power generation and
energy supply, and risk management.
Electricity storage: a device or apparatus that allows electricity to be stored in some form to
be used later as electricity on a network. There are multiple storage methods currently in use
or under trial/study.
Flexibility: includes demand-side flexibility/response, storage, interconnection, flexible
generation, and automated network management.
Flexible generation: generating capacity whose output can be varied to meet the needs of
the system. Flexible generation is said to be dispatchable.
Peak shifting/shaving: the flattening of an electricity consumption load curve. The peak
demand at midday is e.g. shifted to a different time of the day e.g. early afternoon, when
prices are lower; or the peak demand is reduced through an alternative energy source e.g.
electricity production with a diesel generator.
Price-based DSF: customer response is triggered by price changes that reflect variations in
the underlying costs of electricity generation. This form of DSF comprises time-of-use tariffs,
critical peak pricing, or real time pricing. It enables consumers to shift their consumption to
cheaper time periods in order to reduce their electricity bills.
Prosumer: a participant in energy markets who both consumes and generates energy which
can be shared with the DSO, supplier, or other consumers.
TSO: transmission system operator.
Valley Filling: the flattening of an electricity/gas consumption load curve. Load is shifted
from peak times to low/zero demand times e.g. in the night.
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Annex 3 – Results of Internal NRA survey and Public Workshop
Internal NRA survey
The survey explored how demand-side flexibility arrangements operate in different countries
(with a particular focus on regulatory responses to the implementation of the Energy
Efficiency Directive 2012/27/EC).
The results of this survey provided a useful first impression of activity between different
National Regulatory Authorities (NRAs) helping to inform some national case studies and a
high level summary of the regulatory position in relation to demand-side flexibility. Some of
the key messages emerging from the survey are outlined below (more detail can be found in
the consultation document).








DSF was considered to be explicitly mandated in only a few MS (Austria, France,
Germany, Hungary and Portugal). Adoption of the Energy Efficiency Directive should
change this.
Some NRAs have specific roles, though these were predominantly pilot projects and R&D
based. An interesting example was the offer of real-time wholesale prices for retail users
(Netherlands).
In the context of Article 15.4 of the EED which refers to tariffs and energy efficiency,
several countries have had longer term experience with the use of network tariffs and
regulation to improve efficiency, including in trying to reduce network losses.
Although national legislation is often seen as the driver for the uptake of tariffs and
regulation, only Portugal and France stated that they had a legal mandate.
The absence of smart metering in households is seen as a key barrier to demand-side
flexibility which if addressed could also be one component of achieving customer
awareness of energy efficiency.
There are differing market structures for enabling/constraining demand-side flexibility,
ranging from countries where DSF is not permitted to those where it is active in the day
ahead, balancing or other energy markets.
Minimum sizes for the provision of balancing services may constrain the emergence of
DSF but pooling is in many cases a potential solution.
Emerging factors (enabling/constraining) affecting demand-side flexibility include the
minimum size of take up of smart meters, the openness of capacity mechanisms (where
they exist) to DSF, and the rationale/potential for DSF in non-connected systems such as
islands.
This initial work also informed our definition of demand-side flexibility as incorporating both
market-led and network-led approaches, based on some form of signal and response being
exchanged between the energy system participant and customer (see Chapter 2 of this
report).
Public Workshop
The public workshop held at the CEER premises in Brussels on 18 November 2013 served
as a useful forum for stakeholders to provide first reactions to our consultation questions and
to discuss the wider context of DSF including what stakeholders viewed as barriers and
opportunities as well as the importance for consumers. A summary of the workshop and its
presentations can be viewed here.
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Public Consultation
CEER conducted its public consultation on the Regulatory and Market Aspects of DemandSide Flexibility from 18 November to 20 December 2013. The consultation attracted 39
responses from various stakeholders across the EU. An evaluation and full list of the nonconfidential responses can be viewed here.
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Annex 4 – Case Studies
It was not possible to include the case study below in our consultation document. In it the
Portuguese regulator ERSE outlines the situation with regard to time of use (ToU) tariffs and
critical peak pricing (CPP).
Case study – Portugal
In Portugal, time of use tariffs have been in place for a long time and a significant percentage
of consumers use them.
A ToU tariff option split into two time periods makes up 27.3% of Normal Low Voltage (NLV)
consumers (those with less than 20.7 KVA total consumption, i.e. mainly residential) on the
Portuguese mainland, 3.2% in Azores and 11.6% in Madeira. Another ToU tariff with three
time periods represents 31.2% of NLV consumers in the Azores18. NLV consumers with less
than 20.7 kVA consumption make up 35% of total Portuguese demand.
For Normal Low Voltage consumers between 20.7 kVA and 41.4 kVA (i.e. commercial/small
industrial), a tariff option with three time periods is in place and is mandatory (no flat tariff
option exists). This group of consumers (20.7KVA-41.4KVA) represents 8% of total
Portuguese demand.
For Special Low Voltage (SLV) consumers (above 41.4 kVA) four time period ToU tariff
option is in place. Again this is mandatory and this group of consumers makes up 7% of total
demand.
For higher voltage levels (Medium Voltage, High Voltage and Very High Voltage, MV, HV,
VHV) a four time period ToU tariff is in place as a minimum requisite. Consumers may
choose ToU tariffs up to hourly values making dynamic pricing possible, depending on the
market functioning. The MV-HV-VHV group of consumers accounts for 50% of the total
demand in Portugal.
In other words, access tariffs for these voltage levels are mandatory at 4 time periods, and
the meters allow also the energy component to be priced on an hourly basis19. Due to the
large penetration of renewables in Portugal, ERSE wants to go further in encouraging more
dynamic tariffs/pricing.
The revision of the Tariff Code of July 2011 establishes that, with the objective of introducing
dynamic tariff options, the TSO and DSO of Portugal’s mainland and islands (Azores and
Madeira) have to regularly send the regulator studies on:
 the viability of the introduction of this type of tariff;
 the definition of the necessary variables to design these tariff options; and
 any other relevant issues for the introduction of this type of tariff.
18
19
Tariff options in the Azores consist of a flat tariff, 2 period ToU, and 3 time period ToU.
Currently, the energy component is usually priced on a 4 time period basis.
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Following the results of these studies, pilot projects will determine if the introduction of
dynamic pricing will have a net positive benefit, both on the mainland and on the islands
where regulated prices are permitted. The experience acquired from these pilot studies may
enable an application of dynamic pricing on a much larger scale.
In this way ERSE is creating the regulatory framework for the innovation of grid access
tariffs, establishing tariff options that lead to the active participation of users. In the medium
to long term these users may choose, for example, CPP tariff options as they become
acclimatise to engaging with different pricing and tariffs, and gradually participate in more
valuable forms of DSF.
Higher renewable penetration creates more volatility in terms of energy costs, system service
costs, and grid allocation costs. Therefore DSF will be more and more valued going forward.
The flexibility introduced by CPP options allows that demand, motivated by strong price
signals applied in critical times for networks or generation, follows offers variations. In this
context, the introduction of CPP options in the grid access tariffs has the following objectives:

To allow consumers to participate in mechanisms that lead to a more efficient use of
the grids and consequently allows minimized grid costs, in benefit for all consumers.

To provide to the grid operators an alternative mechanism to minimize grids use
costs, since it allows the reduction of demand in situations of higher consumption and
the postponement of new investments.

To allow the minimization of the variable costs for generation and system operation.

To allow the benefits obtained from grid, energy, and ancillary services costs to
contribute to wider electricity system security
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Assorted studies highlighted by responses to the public consultation
23 respondents to the CEER public consultation on DSF provided links to relevant or related
studies. A small number addressed the question of the costs and benefits of demand-side
flexibility measures to a limited degree, although a direct comparison is difficult as they refer
to different countries and the studies are based on different assumptions and preconditions.
What follows is an overview of the studies which gives a snapshot of some of the benefits of
DSF as well as a selection of related quantitative and qualitative data grouped under
thematic headings.
Demand-Side Flexibility / Demand Response

The study “Smart Tariffs and Household Demand Response for Great Britain”20 published
by Sustainability First together with the Brattle Group identified some possible economic
and carbon savings from household demand response in the UK. These savings and
benefits are based on several preconditions (such as the roll out of smart meters) and
measures which should follow the preconditions identified in this study. The results show
potential customer benefits and CO2 savings from household demand response in the
order of €1.2-3.1 million21 for electricity demand reduction and up to €318 million for
electricity ToU tariffs/load shifting for the period 2021-2030. For the same period the CO2
savings from demand reduction and load shifting are estimated between 7-18 and 0.4-1.8
Mt CO2 respectively22.

The “Empower Demand”23 study by VaasaETT, a global energy think tank, reviewed over
100 pilots that dealt with dynamic pricing programmes enabled through smart metering
technologies. The large comparative sample indicates that ToU, Real-Time-Pricing, etc.
do effectively reduce energy demand during periods of high prices.

Energy Pool (2013) estimates total peak clipping capabilities through demand response
between 6% - 11% (corresponding to 35 - 60 GW). VDE’s study "Demand Side
Integration"24 described a theoretical German DR-potential of 25 GW in 2010 (to be
doubled by 2030), of which 8.5 GW are technical/economical potential, confirmed by the
dena-Netzstudie II. Smart appliances have a large potential. The project SMART-A
estimated that the demand response potential in the EU by smart appliances only was
about 60 GW of controllable load, of which 40-42 GW are economically viable.25
20
21
http://www.sustainabilityfirst.org.uk/docs/2010/Sustainability%20First%20%20Smart%20Tariffs%20and%20Household%20Demand%20Response%20for%20Great%20Britain%20%20Final%20-%20March%202010.pdf
All figures in British Pounds have been converted to Euros using the 2013 ECB Average Exchange Rate of
1€:£0.8493
22
Estimated Economic and Carbon Potential from Household Demand Response to 2030, Source: [Sustainability
First, “Smart Tariffs and Household Demand Response for Great Britain”, March 2010]
23
http://www.vaasaett.com/2012/03/final_empower/
24
25
http://www.vde.com/de/Verband/Pressecenter/Pressemappen/Seiten/Energiespeicher.aspx
All from European Commission Staff Working Document, ‘Incorporating demand side flexibility, in particular
demand response, in electricity markets’ (2013)
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Ensuring market and regulatory arrangements help deliver demand-side flexibility

In 2008, Capgemini explored the development of demand response throughout the EU15 and, under its dynamic scenario (increased implementation of demand response
programmes, achievement of the EU 20% energy saving objective, full implementation of
advanced smart meters or smart energy boxes by 2020), predicted €25 billion in annual
electricity bill savings for customers by 2020 as well as €50 billion in avoided investment
related to peak generation capacity26.

The final report for the European Commission on “Benefits of an integrated European
energy market” (June 2013)27 identifies material gains from demand side response (by
reducing the requirement for additional generation and transmission capacities) in the
order of €4bn per year across Europe. The dena0Netzstudie II identified cumulative
potential savings of €10 billion for Germany alone.

In an evaluation made by the European Commission Services on the basis of available
expert research, including the Impact Assessment accompanying the Commission’s
proposal for the EED (SEC(2011)779)28, energy savings across Europe from demand
response have been estimated to be at a minimum of 15 Mtoe in 2020. Capgemini’s 2008
study estimated that the savings could amount to 100 TWh of annual energy savings in a
conservative scenario, achieving 200 TWh of annual energy savings under its dynamic
scenario.

In an Imperial College London analysis29, demand-side response (DSR) tends to have
the highest value compared to other balancing technologies. The analysis does,
however, assume there are no costs associated with DSR. Although smart meters have
already been mandated (and could be considered the main technology cost) in reality
there are likely to be further technology and non-technology costs associated with the
deployment of DSR. These might include equipment so appliances can communicate to
the smart meter, data and communications costs, system upgrades for suppliers, product
changes or the need to compensate consumers or reward certain behaviours. This
means that the analysis may overestimate the value of DSR, particularly in comparison
with storage. Nevertheless, even at low penetration (10%) there are considerable
benefits across all pathways.

E.ON internal studies describe the benefits of demand-side flexibility options for retail
customers vis-à-vis the need for energy intensive appliances (e.g. heat pumps, microCHP). For commercial and industrial customers, DSF solutions can offer benefits greater
than the associated costs, especially if generation overcapacity is reduced.
Consumer behaviour and retail tariffs
26
27
28
29
http://www.capgemini.com/resource-fileaccess/resource/pdf/Demand_Response__a_decisive_breakthrough_for_Europe.pdf
http://www.europarl.europa.eu/RegData/etudes/etudes/join/2013/504466/IPOLJOIN_ET(2013)504466(ANN04)_EN.pdf
http://ec.europa.eu/energy/efficiency/eed/doc/2011_directive/sec_2011_0779_impact_assessment.pdf
Referenced in the UK Department of Energy and Climate Change (DECC)’s ‘Electricity System: Assessment of
Future Challenges – Summary’, 9 August 2012
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/48549/6098-electricity-systemassessment-future-chall.pdf
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Ensuring market and regulatory arrangements help deliver demand-side flexibility

The report “Demand Side Response in the domestic sector- a literature review of major
trials”30 by Frontier Economics and Sustainability First reviews 30 DSR trials in the
domestic electricity sector. Key findings include that consumers do shift electricity
demand in response to economic incentives; that interventions to automated responses
deliver the greatest and most sustained household shifts in demand where consumers
have certain flexible loads, such as air conditioners or electric heating; that after
automation, a combination of economic incentives and enhanced information generally
delivers the greatest demand response; and that consumer feedback on tariffs and
interventions aimed at encouraging DSR was generally positive.

However, the same study suggests that testing of real-time pricing for households has
not produced robust results and there is limited evidence on the way consumers shift
their electricity use in response to incentives. For example, with the exception of airconditioning and storage heating, it is not clear which appliances consumers are willing to
use in a flexible way. In addition, there is limited evidence on whether DSR persists over
time if it is not automated or directly controlled.

In the Electricity Smart Metering Customer Behaviour Trials in 2011 (of the Commission
for Energy Regulation in Ireland) it was noted that consumers tended to overestimate
how much money they would save by reducing peak usage, until they received a bill.
Some consumers were disappointed by how much they had saved, leading to risk of
disillusionment; this suggests that the peak shifting would not necessarily be a long-term
effect or that measures would be needed to establish/manage expectations.

The Sustainability First (UK) 2010 study on Smart Tariffs and Household Demand
Response for Great Britain31 references separate studies/trials in Canada, the USA,
Northern Ireland and Australia with the following results.

Northern Ireland: time of use tariff trials suggested that many prepayment users actually
benefited from time of use tariffs without having to change their behaviour. The Keypad
Powershift trial was undertaken with 200 customers from October 2003 to September
2004. 18 100 customers were given 4 time bands and 3 ToU tariff rates. They were
compared to a control group of 100 customers with a flat-rate tariff. The average spend
by those on the ToU tariff was €438 compared to €463 by the control group. However, if
the time-of-day price bands had been applied to the control group’s usage, they would
have paid €445, saving around three quarters of the amount that those who were aware
of the ToU bands saved.
This may suggest that that much of the saving for the PMG was passive (i.e. reflecting
lower use at peak periods by keypad customers in general) rather than an active
response to the price signal. This may be because the trial participants are at home
during the day and thus use appliances more at off-peak times.
30
31
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/48552/5756-demand-sideresponse-in-the-domestic-sector-a-lit.pdf
http://www.sustainabilityfirst.org.uk/docs/2010/Sustainability%20First%20%20Smart%20Tariffs%20and%20Household%20Demand%20Response%20for%20Great%20Britain%20%20Final%20-%20March%202010.pdf
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Ensuring market and regulatory arrangements help deliver demand-side flexibility

USA: in Californian trials of Critical Peak Pricing (CPP), high-use customers responded
significantly more in kW reduction than low-use customers, but low-use customers saved
significantly more in percentage reduction of their annual electricity bills than high-use
customers. Low-use customers saved an average of 4.0% on their electricity bills, while
high-use customers saved an average of only 1.7%.

Canada: in March 2007, Hydro One Networks Inc. (Hydro One) received approval from
the Ontario Energy Board (OEB) for a pilot project involving 500 residential, farm and
small business customers for 5 months (May to September 2007) to assess their
response to TOU pricing. Instead of paying the Regulated Price Plan (RPP), pilot
participants were asked to pay the OEB-approved RPP TOU rates. In this pilot, the peak
period was 11am-5pm on weekdays, with 7-11 am and 5-10pm mid-peak and 10pm-7am
off-peak. All times at weekends were also off-peak.

Most Hydro One pilot participants (76%) were better off with the RPP TOU rates during
the pilot period. Customers who were better off on average gained about $6 per month,
while customers who were worse off on average lost about $2 per month. As in the
Northern Irish study above, 32% of pilot participants were better off on the RPP TOU
rates without needing to use any less electricity overall. These customers were likely to
have a greater percentage of usage during the mid-peak and off-peak periods.
In the pilot, about 14% of customers were worse off under the RPP TOU rates, despite
making an effort to reduce their electricity consumption relative to the previous year.
These customers are likely to have a greater percentage of consumption during on-peak
and mid-peak periods.
The researchers concluded that customers who are at home during the day will likely be
negatively affected by the RPP TOU rates and will need to shift and/or conserve more in
order to offset the impact. They also concluded that customers with low electricity usage
are likely to be negatively impacted or less able to engage with RPP TOU pricing, as
there is only a limited amount of load above the base load that they are able to shift or
conserve.
Energy efficiency

Another trial from Energy@home32 was able to show an average energy saving of 11 %
due to the use of smart appliances (i.e. smart washing machine). In this trial, 50 users
used a smart management-metering system over a period of 6 months.
Smart Grids and Smart Meters

32
33
In its recent paper “Smart Grids: Future proofed for consumers?”33 Consumer Futures
studied the development of smart grids and demand side response from the perspective
of British energy consumers. Consumer Futures found that calculations of the benefits of
demand side flexibility to the electricity system and actors within it vary considerably.
http://www.energy-home.it/Documents/Energy@home%20Workshop%2026Nov2013/05BellifemineEtAlEnergyAtHome.pdf
http://www.consumerfutures.org.uk/files/2013/07/Smart-grids.pdf
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Ensuring market and regulatory arrangements help deliver demand-side flexibility

A study by Redpoint and Element Energy for DECC suggests that DSR from domestic
households could save between €71 million and €589 million a year by 2030 in Great
Britain34. The analysis claims that if all of these savings were shared equally among all
consumers, this could translate to between €5.89 and €17.67 a year per household, or, if
the savings were passed only to those on DSR tariffs, up to €106 per household. The
savings included in the analysis are reductions in generation investment and operation,
and distribution network investment costs, but not apparently transmission cost savings.

The most recent Smart Metering Impact Assessment (SMIA), published by DECC in April
2012, puts an overall value of €966 million to 2030 for static DSR in Great Britain35.The
figure of €966 million was obtained by summing the figures quoted for avoided network
investment, generation short run marginal cost savings, and avoided generation
investment from TOU tariffs – about €47 million a year. This figure does not include any
benefits from dynamic DSR but it does include avoided investment for the transmission
network. These benefits are labelled in the SMIA as accruing to industry, rather than to
consumers as in the Redpoint work.

Imperial College London analysis assessed the potential value of Automated Demand
Response (ADR) as part of wider study examining the functionality of ADR36. The net
present value of the cost of ADR was estimated at between approximately €67000 and
€115,000 per building over 30 years, based on deployment as per this trial in 20
buildings. Estimates of network reinforcement costs were used to calculate the minimum
levels of demand reduction that ADR in this cost range must achieve to make it a
financially viable alternative to reinforcement. Minimum levels were then compared to
expected summer and winter load shed from the buildings studied as above. This
indicated that the expected reductions in summer load from the three individual buildings
studied would exceed the minimum, making ADR viable if network reinforcement is
driven by demand peaks in summer, rather than winter.

The project SMART-A estimated that the broad use of smart appliances could yield an
increased uptake of wind power in the system of up to 70% and a reduction of fossil fuel
consumption of up to 6% by 2025. For Germany, VDE estimates a controllable amount of
electricity of 43 TWh by 2030.
34
35
36
Redpoint and Element Energy (2012) Electricity Systems Analysis – Future System Benefits from Selected
DSR Scenarios for DECC)
(DECC (2012) Smart Meter Roll Out for the Domestic Sector Impact Assessment, Annex 3
https://www.ofgem.gov.uk/ofgem-publications/45830/sset1004-closedown-report.pdf
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Ensuring market and regulatory arrangements help deliver demand-side flexibility
Annex 5 – Related Documents
CEER documents

Status Review of Regulatory Aspects of Smart Metering, Ref: C13-RMF-54-05, 12
September 2013

CEER Response to the European Commission Green Paper “A 2030 Framework for
Climate and Energy Policies”, Ref.C13-SDE-36-03, June 2013

CEER/BEUC A 2020 Vision for Europe’s energy customers, May 2013 (updated)

CEER response to draft THINK report: "From distribution networks to smart
distribution systems: Rethinking the regulation of European DSOs", Ref: C13-SG-0904, 31 May 2013

CEER response to draft THINK report "Shift, not drift: Towards active demand
response and beyond", Ref: C13-CRM-69-05, 31 May 2013

CEER Status Review on the Transposition of Unbundling Requirements for DSOs
and Closed Distribution System Operators, Ref: C12-UR-47-03, 16 April 2013

CEER Advice on the take-off of a demand response electricity market with smart
meters, Ref.C11-RMF-36-03, December 2011

CEER status review of regulatory approaches to smart electricity grids, Ref. C11EQS-45-04, 6 July 2011

CEER submission to European Commission Consultation on Alternative Dispute
Resolution (ADR), Ref. C11-RMC-46-03, 8 March 2011

GGP on Regulatory Aspects of Smart Metering for Electricity and Gas, Ref. E10RMF-29-05, February 2011
External documents

Shift not Drift: Towards Active Demand Response and Beyond, Florence School of
Regulation THINK Report, topic 11, May 2013

Potential Implementation of Demand Side Approach Methods in ERRA Countries,
ERRA Licensing/Competition Committee Case Study Paper, January 2009
EU legislative and European Commission documents

COMMISSION COMMUNICATION on Delivering the internal electricity market and
making the most of public intervention (including its accompanying Staff Working
document on Incorporating demand-side flexibility, in particular demand response, in
electricity markets)
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Ensuring market and regulatory arrangements help deliver demand-side flexibility

DIRECTIVE 2012/27/EU OF THE EUROPEAN PARLIAMENT AND OF THE
COUNCIL on energy efficiency, amending Directives 2009/125/EC and 2010/30/EU

COMMISSION RECOMMENDATION on preparations for the roll-out of smart
metering systems, C(2012) 1342 final
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